Wednesday, February 06, 2013
12:58 AM

With the Yen sinking to new lows nearly every day, and with French President Francois Hollande now in the act of pleading for a lower euro, it's time to step back and review the currency war madness of the past couple of weeks. There is plenty of madness to review.

Japan’s government has to follow through with plans for stimulus spending, monetary easing and a doubled inflation target to sustain a weakened yen, said Mohamed El-Erian, co-chief investment officer of bond giant Pacific Investment Management Co.

Prime Minister Shinzo Abe needs to carry out stimulus spending while Japanese consumers will have to accept rising prices for goods such as oil as the yen depreciates, El-Erian said.

President Barack Obama should tell Japan’s new government that the U.S. will retaliate for policies aimed at weakening the yen, a group representing Ford Motor Co. (F), General Motors Co. (GM) and Chrysler LLC said.

Japan’s Liberal Democratic Party, which reclaimed power last month, has let the yen continue its slide against the dollar, making U.S. auto exports relatively expensive, the American Automotive Policy Council said yesterday in a statement.

“We urge the Obama administration to make it clear to Japan that such policies are unacceptable and will be met by reciprocal measures,” Matt Blunt, a former Republican governor of Missouri and president of the Washington-based industry group, said in the statement.

The world is edging closer to all out currency conflict as Europe’s politicians join a chorus of policy-makers across the globe pushing for devaluations to fight for market share.

Jean-Claude Juncker, EuroGroup chief, has signalled that Europe is no longer willing to be the last economic player holding the toxic parcel of an over-valued exchange rate, describing the euro as “dangerously high” after its three-month surge against the dollar, yuan and yen.

The comments follow warnings by two French ministers this month that the strong euro is holding back efforts to pull the France out of deep industrial slump.

Alexei Ulyukayev, deputy head of Russia’s central bank, said the tilt in EMU policy marks a new escalation as every major bloc of the global economy tries to drive down its exchange rate at the same time. “We are now on the threshold of very serious currency wars,” he said.

Korea has asked the G20 take a stand against beggar-thy-neighbour policies in Moscow next month, accusing Japan and the West of covert debasement through loose money.

Once again Pritchard spoiled an otherwise excellent article with a silly finish: "The underlying problem is a global saving glut as the world saving rate hits a record 24pc of GDP".

Good Grief. With global credit exceeding global GDP by many multiples, and with the US credit market at $55 trillion vs. GDP of not quite $16 trillion, it is preposterous to speak of a global saving glut.

By the way, Austrian economists will correctly point out that it's impossible to ever have too much savings, in any circumstance. However, it's certainly possible to have too much debt (the opposite of savings).

Japan had massive savings, but the Japanese government foolishly squandered all of it with misguided Keynesian stimulus, the same measures that El-Erian now insists are needed.

Also note that Russia is in on the complaining act.

There are a few sane voices in the wilderness. Jens Weidmann at the German central bank is one of those voices.

The erosion of central bank independence around the world threatens to unleash a round of competitive exchange rate devaluations, which leading economies have so far avoided during the financial crisis, the president of Germany’s Bundesbank warned on Monday.

Jens Weidmann, whose institution’s own fierce independence from political influence was the model for the European Central Bank when it was founded, said Stephen King, the chief economist at HSBC, was “perhaps right” in forecasting an end to the era of central bank independence.

“It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” Mr Weidmann said in a speech in Frankfurt.

“Whether intended or not, one consequence could be the increased politicisation of the exchange rate,” he said, according to a text of his speech provided by the Bundesbank. “Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way.”

Alarming Infringements

Weidmann commented on alarming infringements and increased politicisation in Hungary and Japan. He failed to point out Switzerland. Brazil is also complaining mightily, and of course French president Hollande is in on the act? Anyone else?

Of course! Currency manipulation talk and China go hand in hand. Recall that Republican candidate Mitt Romney stated many times that one of the first things he would do would be to label China a currency manipulator. What does China think?

China’s foreign-exchange regulator urged Group of 20 nations to improve collaboration to avoid any so-called currency wars while signaling he’s comfortable with the value of the yuan.

Yi, who heads the State Administration of Foreign Exchange, said he’s concerned about the potential fallout from expanded asset-purchases programs and near-zero interest rates in the world’s advanced economies.

“Quantitative easing for developed economies is generating some uncertainties in financial markets in terms of capital flows,” Yi, who is also head of China’s foreign-exchange regulator, told reporters. “Competitive devaluation is one aspect of it. If everyone is doing super QE, which currency will depreciate?”

Japan's economy minister rejected criticism on Saturday that his country's extraordinary fiscal and monetary stimulus program was aimed at weakening the yen and undermined central bank independence.

"You might think there's a deliberate policy to drive down the value of the yen but we in government refrain from commenting on the exchange rate of the yen," Amari said in response to criticism of Japanese action.

Mish Translation "We have a deliberate policy to drive the Yen lower. No other country supports that, so we don't comment on exchange rates."

Dangerous Situation

The Reuters article continues ...

A European Central Bank source, speaking on condition of anonymity, said the ECB was "not very happy" at what was seen as a step towards competitive devaluations and the Group of 20 major economies' finance ministers and central bankers should address the issue next month.

"It's not a problem yet. But if they (Japan) continue in that direction and we see also what's happening with quantitative easing in the United States and Britain, then we would be the only one who would not follow suit.

"The risk is that this would indeed have an effect on the exchange rate and that we would get into a dangerous situation," the ECB source said.

Mish says "If you are following this discussion at all, you know damn well that the situation is already far beyond dangerous".

In economics, a beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.

Beggar-thy-neighbour policies were widely adopted by major economies during the Great Depression of the 1930s.

Alan Deardorff has analyzed beggar-thy-neighbour policies as an instance of the prisoner's dilemma known from game theory: each country individually has an incentive to follow such a policy, thereby making everyone (including themselves) worse off.

An early appearance of the term, which presumably originates from the name of the Beggar-My-Neighbour card game, is seen in the title of a work on economics from the early period of the Great Depression.

Currency War Idiocy

One voice of reason in the midst of all this madness is my friend Pater Tenebrarum on the Acting Man Blog who writes about The Currency War Idiocy

Harvard University professor Martin Feldstein, long a critic of the euro, said on Jan. 5 that European policy makers should consider a coordinated approach to weaken the euro as a way to rally growth via exports. “A lower euro would make each of the euro-zone countries more competitive relative to the countries outside the euro zone,” Feldstein said.”

There you have it. Even in Harvard they just know somehow that once your money buys less, you've actually become richer. It seems to be the modern-day version of the philosopher's stone. Alchemists everywhere recommend it!

Let us hypothetically assume that we have entered Orwell-land ('war is peace!') and one can actually get richer by lowering the value of one's currency. One problem is obviously that not everybody can do it at the same time. If one wants to cheapen one's currency, other currencies must by necessity increase in value. The next problem is how does one go about it? How can one's currency become worth less than that issued by others? The only solution seems to be to increase its supply – at a rate that exceeds that of the competition. This process is also known as 'inflation'. So in other words, what the wise gentlemen listed above are all advocating is that one should attempt to get rich by means of inflation.

Pure genius! No-one has ever thought of that one! No, wait, a few people have: ...

Please read the rest of the article because Russia, Norway, South Korea, and the UK are all in on the act and Pater has some humorous comments.

Bear in mind, a few years ago there was near-universal agreement the US dollar needed to drop. Now the cat-calls are predominantly for the euro to drop. In practice, nearly all the central bankers want their respective currencies to drop.

What We Know

The US wants a lower Dollar

Eurozone ministers want a lower Euro

Japan wants a lower Yen

The UK wants a lower British Pound

Norway wants a lower Krone

Brazil wants a lower Real

China wants a lower Yuan

What We Also Know

The above is mathematically impossible in relation to each other

The above is mathematically possible in relation to something else

That something else is a currency untouched by central bank and political madness.
That something else is gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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